Gold trading reminder: Double benefit! Powell hints at September interest rate cut, Iran orders counterattack, gold prices soar nearly $40 to near two-week high

2024-08-01 2513

At the beginning of the Asian market on Thursday (August 1st), spot gold fluctuated narrowly and is currently trading around $2447.49 per ounce. Gold prices surged nearly $40 on Wednesday after Federal Reserve Chairman Powell hinted that if inflation meets expectations, interest rates could be cut as early as September, causing a sharp drop in US dollar and Treasury yields. In addition, after the assassination of Hamas leaders in Iran, Iranian leaders ordered direct attacks on Israel, further fueling geopolitical concerns and increasing the demand for safe haven gold.

Spot gold closed at $2447.12 per ounce on Wednesday, up about 1.5% for the day; In July, the cumulative increase exceeded 5%, marking the largest monthly increase since March. US futures closed up 0.9%, with a settlement price of $2473.

Powell said at a press conference held after the Federal Reserve decided to keep the benchmark interest rate unchanged that policymakers are becoming increasingly confident in their goal of steadily approaching 2% inflation, igniting investors' hopes for a rate cut in September.

Tai Wong, an independent metal trader in New York, said, "Chairman Powell's speech suggests that there is a possibility of a rate cut in September, and gold and silver have surged in response. However, he did effectively close the door to a 50 basis point rate cut. Given that the Federal Reserve has just met its recent expectations of strengthening, it remains to be seen whether gold can reach a new record high

On Wednesday, the US dollar index fell 0.4% to close at 104.05, hitting a intraday low of 103.92, the lowest since July 18th. The yield of the US 10-year treasury bond bond fell 2.61%, falling for five consecutive trading days, hitting 4.031% as the lowest intraday, the lowest since March 8, and closing at 1.033%.

Daily Chart of US 10-year treasury bond Bond Yield

Hamas leader Ismail Haniyeh was assassinated in Iran earlier on Wednesday, further destabilizing the Middle East region already embroiled in the Gaza War and Lebanon conflict. The threat of escalating conflicts in the Middle East has strengthened support for safe haven assets.

According to a report by The New York Times, three Iranian officials revealed that Iran's Supreme Leader, Ayatollah Khamenei, issued an order during an emergency meeting calling for Iran to directly strike Israel in retaliation for the death of Hamas leader Haniyeh in Tehran.

On this trading day, investors need to pay attention to the market's further interpretation of the Federal Reserve's interest rate decision, further news on the geopolitical situation, the US July ISM Manufacturing PMI, and the US initial jobless claims for the week ending July 27th.

In addition, the US July non farm payroll report will be released on Friday, and investors should also pay attention to changes in market expectations for this data. Relatively speaking, the positive news of the Federal Reserve's interest rate decision has been largely digested by the market, and attention should be paid to the profit taking situation of bulls and the possibility of a "boot landing" market. However, the geopolitical situation is biased towards continuing to support gold prices, which may limit the short-term downside space of gold prices.

From a technical perspective, before falling below the high of 2431.87 on July 24th, the short-term trend of gold prices continues to fluctuate upwards, and it is expected to test resistance near the historical high of 2483 again.

Daily chart of spot gold

Powell Suggests Possible Interest Rate Cut in September, Fed Decision makers More Confident of Inflation Falling Back to Target

The Federal Reserve held interest rates unchanged on Wednesday, but President Powell said policymakers may be prepared to lower borrowing costs as early as the next meeting in September, with recent data boosting their confidence that inflation is approaching the 2% target.

Powell's speech at the press conference after the policy meeting seemed to endorse the policy reversal in September. The latest policy statement of the Federal Reserve also partially reflects this point.

The Federal Open Market Committee (FOMC) stated in a statement that "further progress has been made in achieving the committee's 2% inflation target." The Federal Reserve had previously announced that it would maintain its target range for overnight interest rates at 5.25% -5.50%.

Powell went further, telling reporters that as long as future inflation data confirms the recent downward trend in inflation, "we are increasingly confident in taking action at the next meeting.

The personal consumption expenditure (PCE) price index in the United States rose by 2.5% year-on-year in June, with a growth rate exceeding 7% in 2022. Moreover, recent month on month readings of the PCE price index indicate that inflation is closer to the target. This is the inflation indicator favored by the Federal Reserve.

Investors believe that Powell's speech clearly opened the door for the Federal Reserve to reduce borrowing costs at its meeting on September 17-18, just seven weeks before the November 5 US election.

MARK MALEK, Chief Investment Officer of SIEBERT NEXT, said: "It can be seen from his speech that they are ready to cut interest rates in September and will maintain their room for choice“

Powell's speech pushed interest rate futures, stock markets and treasury bond bonds up sharply. The CME FedWatch Tool shows that the probability of a 50 basis point rate cut for the first time in September has jumped to about 15%. However, Powell stated that a 50 basis point rate cut is not something they are considering.

Despite being wary of any actions that could undermine its monetary policy guidelines that rely on "data rather than politics," the steady decline in inflation in recent months has led policymakers to widely believe that the inflation battle is coming to an end.

The Federal Reserve stated that inflation is currently "somewhat" high, which is a key softening of language. The Fed has previously referred to inflation as "high" for most of the inflation battle.

Powell stated at a press conference that 'we have not yet made a decision on future meetings', and all policy decisions will be analyzed on a meeting by meeting basis. But he added that as the confidence of Federal Reserve decision-makers in the easing of price pressures continues to increase, "the economy is approaching the appropriate time to lower policy rates.

The latest policy statement from the Federal Reserve also removed the long used phrase 'highly concerned about inflation risks' and instead acknowledged that policymakers are now' concerned about the risks of both sides of their dual task ', namely the mission given by Congress to achieve full employment while maintaining price stability.

Federal Reserve policymakers have previously stated that reducing borrowing costs before inflation truly returns to target levels is appropriate, given the time required for monetary policy to impact the economy.

The Federal Reserve stated in a statement that the economy has "continued to expand at a steady pace" so far, and although "employment growth has slowed down", the unemployment rate "remains low".

But the unemployment rate has been on the rise, and decision-makers have recently been paying more attention to avoiding the situation of sudden increases in unemployment rates often associated with high interest rates and slowing inflation.

The Federal Reserve did not promise to cut interest rates in September in its statement, and reiterated that policymakers still need to have "greater confidence that inflation is continuing to fall towards 2%" before reducing borrowing costs.

But these wording adjustments seem to align with investors' expectations of reaching this level of confidence in September. The Federal Reserve aggressively raised interest rates between March 2022 and July 2023, increasing the benchmark rate by a cumulative 5.25 percentage points to address the most severe inflation in 40 years. FOMC decision-makers unanimously agreed on Wednesday's interest rate decision.

Second quarter wage growth in the United States drops to its slowest pace in three and a half years, providing further justification for September interest rate cuts

The moderate increase in labor costs in the second quarter of the United States, coupled with the slowest growth in private sector wages in three and a half years, further proves that inflation is in a stable downward trend, providing further justification for the September interest rate cut.

Before the Labor Department released its report on Wednesday, last week's data showed a significant decrease in inflation in the previous quarter, with all measures below 3%. As the job market continues to slow down, labor costs may further cool down.

A slight increase in labor costs may be welcomed by Federal Reserve officials, who will end their two-day policy meeting on Wednesday. It is expected that the Federal Reserve will maintain the target range for overnight interest rates at 5.25% -5.50%. The interest rate has remained at this level since July last year.

The salary increase in the private sector is more in line with the level that Federal Reserve officials hope for, "said Christopher Rupkey, Chief Economist at FWDBONDS in New York. The economy is gradually returning to normal. The slowdown in wage growth has given the green light for the Federal Reserve to cut interest rates

The US Bureau of Labor Statistics stated that the Employment Cost Index (ECI) increased by 0.9% in the second quarter and was confirmed to have risen by 1.2% in the first quarter, which is the most widely used indicator to measure labor costs.

Economists surveyed previously predicted that ECI would rise by 1.0%. Labor costs increased by 4.1% year-on-year in June, the smallest increase since the fourth quarter of 2021, and rose by 4.2% year-on-year in March. The annual increase in labor costs has slowed down from 4.5% in June 2023.

Decision makers believe that ECI is one of the better indicators for measuring the degree of labor market slack and predicting core inflation, as it has been adjusted for changes in labor composition and employment quality. The Federal Reserve's inflation target is 2%.

Sarah House, a senior economist at Wells Fargo, said, "Today's data marks an important step for the Federal Reserve towards' more confident 'inflation cooling enough to begin lowering the federal funds rate

The ADP employment report released on Wednesday also confirmed the slowdown in wage growth, showing a 4.8% year-on-year increase in employee wages in July, the smallest increase in three years.

The troubled real estate market has also received some encouraging news. A report from the National Association of Realtors (NAR) shows that due to improved supply, unfinished home sales rebounded by 4.8% in June and decreased by 1.9% in May. However, this does not mean that the market will have a turning point, as affordability remains a challenge. The sales of unfinished homes in June decreased by 2.6% year-on-year.

The rise in mortgage interest rates and high housing prices will become a resistance for homebuyers in the short term, "said Rubeela Farooqi, Chief US Economist at High Frequency Economics. But as the Federal Reserve begins to cut interest rates, inventory increases, and borrowing costs decrease, it should have a positive impact on home sales for some time

The US dollar is falling, and the Federal Reserve is signaling a possible interest rate cut in September

The decline of the US dollar intensified on Wednesday, after the Federal Reserve kept interest rates unchanged but opened the door for reducing borrowing costs at the next meeting in September at the earliest.

Adam Button, Chief Monetary Analyst at ForexLive in Toronto, said, "The Federal Reserve wants data to play a role for a longer period of time, even at the risk of falling behind the curve

Traders have fully factored the September rate cut into prices, which may ease the pressure on the Federal Reserve to send some kind of action signal at that time.

Button said, "Everyone in the market knows this has been digested, and the Federal Reserve also knows this has been digested, so not retaliating is a tacit approval of market pricing

Traders also expect the Federal Reserve to cut interest rates for the second and possibly third time before the end of the year.

The US dollar index fell to a maximum of 103.92, closing down 0.4% at 104.05, with a decline of 1.7% in July.

The next important US economic data that may drive Federal Reserve policy will be the July government employment report released on Friday. According to the median estimate of economists surveyed by Reuters, the report is expected to show that employers added 175000 jobs in the month.

UN Secretary General: The attacks in the southern suburbs of Beirut and Tehran represent a dangerous escalation

On July 31st local time, UN Secretary General Guterres issued a statement through his spokesperson, stating that the recent attacks in the southern suburbs of Beirut, Lebanon and Tehran, Iran are a dangerous escalation.

The statement said that at present, all parties should make efforts to cease fire in Gaza, release all detained persons, increase humanitarian aid to Palestinians in Gaza, and restore peace on both sides of the temporary border between Lebanon and Israel (also known as the "Blue Line"). On the contrary, what can currently be seen are only events that disrupt the achievement of these goals.

The spokesperson stated that the UN Secretary General has always called on all parties to exercise maximum restraint, but at this extremely sensitive moment, restraint alone is not enough. The UN Secretary General urges all parties to actively work towards easing the regional situation for comprehensive long-term peace and stability.

The statement said that the international community must work together and take urgent measures to prevent any events that may push the Middle East region to the brink of crisis and have a devastating impact on civilians from happening. To achieve this goal, it is necessary to promote comprehensive diplomatic actions and ease the regional situation.

US media: Iranian leader orders direct attack on Israel

According to a report by The New York Times, three Iranian officials revealed that Iran's Supreme Leader, Ayatollah Khamenei, issued an order during an emergency meeting calling for Iran to directly strike Israel in retaliation for the death of Hamas leader Haniyeh in Tehran.

Iran and Hamas accuse Israel of carrying out an assassination on Haniya, who was attending the inauguration ceremony of Iran's new president in Tehran at the time. It is still unclear how strong Iran's response will be, and whether it will adjust its attack again to avoid escalation of the situation.

Iranian officials have stated that Iranian military commanders are considering launching another joint drone and missile attack on military targets near Tel Aviv and Haifa, but will be careful to avoid attacking civilian targets. One option being considered is to launch a coordinated attack from Iran and other allied fronts, including Yemen, Syria, and Iraq, to achieve maximum effectiveness.

US and Europe urgently mediate to prevent a full-scale war from erupting in the Middle East

According to the Financial Times, after Israel attacked Hezbollah and Hamas leaders in the Lebanese capital Beirut and the Iranian capital, Iran and Hezbollah respectively vowed to retaliate against the attacks, and concerns about broader regional conflicts have surged.

US and EU diplomats are urgently discussing the Middle East region in an attempt to prevent the threat of a full-scale regional war. One of the highest ranking diplomats of the European Union, Mora, held important talks with Iranian officials.

Meanwhile, Brett McGurk, the Coordinator for Middle East and North Africa Affairs at the US National Security Council, is holding talks in Saudi Arabia. Officials stated that the focus of the talks is to persuade Iran to either not respond or take symbolic actions.

The White House is trying to downplay the possibility of a full-scale war, although officials privately admit that this is one of the most sensitive moments since October 7th last year.

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